Recycling Pension ?

jamesd

The way it works with salary sacrifice is:

1. Employer can let you sacrifice down to minimum wage and you should probably do this. Law bars them from going below minimum wage. This gets you part of the relief during the tax year automatically.
2. You tell HMRC about your expected post-sacrifice pay for the year and also about any non-sacrifice pension contributions you make.
3. HMRC issues tax codes to give you any extra relief you're entitled to. If post-sacrifice gross pay plus taxable pension gross plus other taxable income is up to the basic rate limit there won't be any extra relief, else they will tell work or pension to deduct less tax via a coding notice to give you however much extra higher rate relief you're entitled to.

One tool to consider is the small pots rule. This lets you take all of the money out of a pension pot worth up to £10,000 and doesn't trigger the MPAA. So you could say open a SIPP with Hargreaves Lansdown now and pay in gross £13,300 then after waiting a year (or paying their closure within one year charge) you can:

A. Take a 25% tax free lump sum of £3,325 and place the remaining £9,975 into drawdown, leaving nothing in the uncrystallised pot.
B. Take the £9,975 as a small pot lump sum. It'll all be taxed because you already took the tax free lump sum.

You can potentially do all of this early in the tax year so that the net £10,640 you pay in doesn't have to be tied up for long.

Except for occupational schemes you're restricted to using the small pots rule no more than three times during your life.

The £13,300 gross is conveniently close to the income that your employer isn't allowed to let you sacrifice due to the minimum wage law. So it could be a neat way to pay in 100% of pay without tying up 100% of pay inside a pension.

You can potentially avoid early closure charges by planning more than a year ahead, like opening an account somewhere else now that you wouldn't use until more than a year from now.

jamesd

High lump sum may make sense because subject to the recycling limits you can recycle much of it or just invest it in things like P2P that you can't readily do within a pension at the moment.

If you were able to take the DB this tax year the recycling restrictions on the lump sum would end on 6 April 2019. One year later if you don't do it before 6 April 2017. This is the five year rule: tax year it's taken and the two following ones being the relevant restriction period.

pensionpawn

Fairly knowledgeable (well more than most around me) of pension rules however I'm not sure if I follow all of the above. Therefore I am correct in saying that if you trigger the £4k rule by accessing one of your pension pots then this applies to all of your pots?

Also, does anyone know if once the trigger has occurred, if you are a higher rate tax payer you can claim relief on the £4k contributions at higher rate (via salary sacrifice or tax return?)

xylophone

Read http://www.pruadviser.co.uk/content/knowledge/technical-centre/money_purchase_annual_allowance_mpaa/#



https://adviser.royallondon.com/technical-central/pensions/contributions-and-tax-relief/defined-benefits-and-the-mpaa/

The MPAA applies to all Defined Contribution (DC) savings made by that individual after the date it's triggered.

It is the annual allowance that has reduced, not the tax relief available on that reduced allowance.

pensionpawn

So if the total of drawdown plus employed income nudges you into the 40% tax bracket £4000 of pension contribution would only cost you £2400 with the government stumping up the additional £1600. Thus stepping into the 40% bracket by £1 could save you £800?

jamesd

You only get higher rate relief for the portion taxed at higher rate. So a Pound into higher rate gets you 20p basic and 20p higher.

pensionpawn

I wasn't aware of that so thanks for clearing that up. No real incentive then to push the 'income' up in 'retirement' then!

fizio

A follow on question if i may...

If you are at LTA and then take your pension (my situation soon) then is there any point/advantage to continue investing in a pension - either from earned income or at the 4000 limit level?

pensionpawn

haf63 wrote: »

A follow on question if i may...

If you are at LTA and then take your pension (my situation soon) then is there any point/advantage to continue investing in a pension - either from earned income or at the 4000 limit level?

I'm new to the term LTA and am not sure how to answer your question other than saying that the reason for looking to invest £4k every year is just to top up the fund a little, making use of the tax relief. In my line of work after retiring I could take on a months worth of work a year (October or November or end of February / March up to the end of the tax year). If the work doesn't happen one year then it's no big deal.

Out of interest, has the government stated that the new £4k limit will be indexed each year?

fizio

sorry - LTA i.e Lifetime allowance limit of 1m pounds.
My understanding is that the limit is fixed (aside from index linking) so if i am at 1m when i retire then earnings via a part time job etc will not be able to be put into a sipp to gain a tax advantge due to the LTA excess of 55% tax.